Two-time finalist for Gerald Loeb Award - this year for Forbes magazine work and in 2010 for online commentary and blogging. I am a C.P.A. and freelance journalist with credits in the Financial Times, Boston Review, American Banker, Columbia Journalism Review, Accountancy Age, Accountancy Magazine, Forbes, and others. I also blog at my own site, re: The Auditors, a specialized news site about the business of the Big 4 audit firms. I have been quoted in the New York Times, Wall Street Journal, Chicago Tribune, Crain's Chicago Business, Chicago Magazine, Chicago Sun-Times, Financial Times, Reuters, Forbes, Harvard Business Review, BusinessWeek, American Lawyer, California Lawyer, American Banker, Columbia Journalism Review, The Times of London, The Guardian, the Financial Chronicle (India) and others. To reach me email fmckenna2010@gmail.com.

You can’t blame global accounting firm Ernst & YoungErnst & Young for seizing a big business opportunity. Tax transparency reporting is coming, whether multinationals like it or not, and Ernst & Young is ready to help. The Global Tax practice, led by American in London David Holtze, published “Tax Transparency: Seizing the Initiative” this week. The paper is a strong call to action for global multinationals: Start voluntarily being a bit more transparent about taxes before governments worldwide mandate something much more revealing.

Big Four accounting firms are expert at making hay when the sunshine of fuller disclosures threatens to reveal too much. Regulatory uncertainty over tax disclosures, such as country-by-reporting, is the perfect opportunity for Ernst & Yong to step in and provide its clients with ongoing lucrative guidance.

You might wonder though, “Doesn’t Ernst & Young have enough trouble with regulators and legislators about tax issues?”

Last September Senator Carl Levin’s Permanent Subcommittee on Investigations called Ernst & Young to Washington DC to explain how clients HP and MicrosoftMicrosoft move profits offshore to avoid taxes. Ernst & Young charged HP almost $2 million extra for tax partner Beth Carr’s testimony about the tax-related services provided to its audit client.

Ernst & Young is already under investigation by the SEC, according to Reuters reports, for providing tax lobbying services to other audit clients, a potential auditor independence violation.

So I was somewhat surprised to see the Guardian on Tuesday report that Ernst & Young held a “high-level lobbying meeting at Number 10, urging the prime minister not to support calls for financial transparency measures which have been proposed by tax fairness campaigners.”

Ernst & Young is “lobbying” the Prime Minister to reject calls by organizations such as the Tax Justice Network (TJN), Global Witness, Save the Children, Cafod and the ActionAid urging governments to impose new rules on multinationals requiring separate reporting on financial activity for each country in which they operate.

So-called country-by-country reporting has already been imposed on mining and oil extraction groups by the US and is shortly to be extended to banks by the EU. “The floodgates are, however, not yet open,” said Dixon in a paper published yesterday.

He suggested multinationals should “seize the initiative” and called on them to consider measures to “appease the fair tax lobby” if they want to head off mounting calls for tougher rules to stop them shifting profits to low-tax jurisdictions.

What are the measures that may “appease” and “head off” tougher rules? Ernst & Young’s paper points out there are very few mandatory requirements regarding tax transparency. Voluntary additional disclosures might allow organizations to “create their own formats and approaches beyond the tax figures reported in the annual report and accounts.”

Supplementary figures in the annual report to support the comments made in relation to tax matters in the past.

Disclosures to explain the economic contributions made to governments and emerging economies via taxes borne and collected.

Disclosures of tax policies and strategies, often focusing on maintaining open and transparent relationships with tax authorities such as HMRC. These disclosures often illustrate how the group chooses to engage in the debate on how it behaves and the principles followed in setting their tax strategy.

Several groups include fairly general narrative discussion of tax in their annual report and accounts, with discussion of tax strategy and compliance; the socio-economic benefit the group brings through paying taxes; and how the group manages tax risk as part of the corporate governance protocols.

A select few groups have prepared separate reports outside the annual report and accounts, often with detailed information both on total taxes paid and on tax strategy.

What’s in it for Ernst & Young? From the “Tax Transparency“ white paper:

“In some cases the information is subject to an external assurance review…”

If you provide additional disclosures, your audit fees may increase.

“Once companies have decided what information to report, they must put governance, systems and processes in place to gather and report that information completely and accurately.”

“Gathering data to help enable stakeholders to appreciate tax contribution on a country by country basis is not an exercise which can be undertaken lightly but demands a thoughtful and structured approach to make it successful.”

Those are huge consulting opportunities for the Big Four firms like Ernst & Young.

“The audit requirements of tax transparency disclosures will vary depending on where the information is disclosed. As tax transparency reporting receives increasing stakeholder focus, it is likely that companies will come under pressure to move towards a certain level of assurance on these separate reports, potentially comparable to what is applied to financial statements…As this trend continues, stakeholders may well come to expect that the information has been validated by a third party.”

Ernst & Young is preparing clients for a service that will audit their tax transparency reporting similar to what is developing around corporate social responsibility reporting. If the rules do change and bring more required disclosures to traditional financial statement quarterly and annual reporting, Ernst & Young as your auditor can help you with that, too.

Ernst & Young, and the rest of its Big Four brethren, are already providing additional tax services to audit clients that meet or exceed the cost of the audit. An exception for tax services was carved out for the audit firms in the U.S. via compromise during the making of the Sarbanes-Oxley law. Tax services for audit clients were too lucrative for the firms to give up to competitors. But lobbying or legal advocacy on behalf of audit clients is forbidden by SEC auditor independence rules. Providing both extensive tax services and audit services to multinationals in the UK has never been an issue as similar attempts at some semblance of auditor independence with regard to tax consulting services was never legislated there.

I asked EY which clients the firm was “lobbying” the Prime Minister – to borrow the words used by the Guardian – on behalf of. Vicky Conybeer, head of PR for EY in the UK responded:

”Ernst & Young have not been ‘lobbying’ the UK Government on this issue either on behalf of a single client or group of clients. The report EY issued yesterday which was sent to the Guardian and other media outlets, highlighted measures that would encourage transparency in the UK tax system.”

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